2018-0782751R3 Standard Loss Consolidation

Principal Issues: Whether Lossco would be entitled to apply existing non-capital losses against the interest income that would be generated as part of particular loan that would be made under the loss consolidation transaction and whether the accompanying interest expense would be deductible by Profitco.

Position: Yes.

Reasons: The proposed transactions conform to our requirements for these types of loss consolidation rulings. The proposed transactions would be legally effective and commercially realistic.

Author: XXXXXXXXXX
Section: 245; 20(1)(c); 112(1); 55(2); 88(1.1)

XXXXXXXXXX                                                                             2018-078275

XXXXXXXXXX, 2019

Dear XXXXXXXXXX:

Re:   Advance Income Tax Ruling Request
         XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”). We also acknowledge the information provided in correspondence concerning your request.

To the best of your knowledge and that of the taxpayers involved, none of the proposed transactions or issues involved in this Ruling request are the same as or substantially similar to transactions or issues that are:

i.    in a previously filed tax return of the taxpayers or a related person and:

A.    being considered by the CRA in connection with such return;

B.    under objection by the taxpayers or a related person; or

C.    the subject of a current or completed court process involving the taxpayers or a related person; or

ii.   the subject of a Ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise stated all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) as amended (the “Act”).

This document is based solely on the facts described below. Any documentation submitted with your request does not form part of the facts except as expressly referred to herein, and any references thereto are otherwise provided solely for the convenience of the reader.

DEFINITIONS

XXXXXXXXXX;

“affiliated persons” has the meaning assigned by section 251.1, read without reference to the definition of “controlled” in subsection 251.1(3);

“CBCA” means the Canada Business Corporations Act (Canada), and where applicable, its predecessor statutes;

“CRA” means the Canada Revenue Agency;

“dividend rental arrangement” has the meaning assigned by subsection 248(1);

XXXXXXXXXX;

XXXXXXXXXX;

XXXXXXXXXX;

“Lossco” means XXXXXXXXXX.;

“Lossco Loan 1” means an interest bearing loan made by Lossco to Profitco 1 as described in Paragraph 20 below;

“Lossco Loan 2” means an interest bearing loan made by Lossco to Profitco 2 as described in Paragraph 20 below, and together with the Lossco Loan 1, the “Lossco Loans”;

“Newco 1” is a corporation to be incorporated under the CBCA, as described in Paragraph 17;

“Newco 2” is a corporation to be incorporated under the CBCA, as described in Paragraph 17, and together with Newco 1, the “Newcos”;

“Newco 1 Common Shares” means the common shares to be issued by Newco 1 to Lossco and has the meaning assigned in Paragraph 17;

“Newco 2 Common Shares” means the common shares to be issued by Newco 2 to Lossco and has the meaning assigned in Paragraph 17, and together with Newco 1 Common Shares, the “Newco Common Shares”;

“Newco 1 Loan” means a non-interest bearing loan made by Newco 1 to Lossco, as described in Paragraph 22 below;

“Newco 2 Loan” means a non-interest bearing loan made by Newco 2 to Lossco, as described in Paragraph 22 below, and together with the Newco 1 Loan, the “Newco Loans”;

“Newco 1 Note” means a non-interest bearing promissory note issued by Newco 1 to Profitco 1 as described in Paragraph 28 below;

“Newco 2 Note” means a non-interest bearing promissory note issued by Newco 2 to Profitco 2 as described in Paragraph 28 below, and together with the Newco 1 Note, the “Newco Notes”;

“Newco 1 Preferred Shares” means preferred shares to be issued by Newco 1 to Profitco 1 as described in Paragraph 17;

“Newco 2 Preferred Shares” means preferred shares to be issued by Newco 2 to Profitco 2 as described in Paragraph 17, and together with the Newco 1 Preferred Shares, the “Newco Preferred Shares”;

“non‑capital loss” has the meaning assigned by subsection 111(8);

“paid-up capital” has the meaning assigned by subsection 89(1);

“Parent” means XXXXXXXXXX;

“Payment Period” means a calendar month;

“Profitco 1” means XXXXXXXXXX;

“Profitco 2” means XXXXXXXXXX, and together with Profitco 1, the “Profitcos”;

“Proposed Transactions” means the transactions described in Paragraphs 17 to 29;

“related persons” has the meaning assigned by section 251;

“Subsidiary” means XXXXXXXXXX;

“Subsidiary Loan 1” means the loan made by Subsidiary to Lossco, the principal amount of which will equal the aggregate principal amounts of the Lossco Loan 1, as described in Paragraph 19 below;

“Subsidiary Loan 2” means the loan made by Subsidiary to Lossco, the principal amount of which will equal the aggregate principal amounts of the Lossco Loan 2, as described in Paragraph 19 below and together with Subsidiary Loan 1, the “Subsidiary Loans”;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“Treaty” means the XXXXXXXXXX.

FACTS

1.    Parent, through its subsidiary corporations, is a global provider of XXXXXXXXXX.

2.    Parent is a corporation incorporated under the laws of XXXXXXXXXX for purposes of the Act and a resident of XXXXXXXXXX.  Parent is XXXXXXXXXX.  There have been no acquisitions of control of Parent or of any of its subsidiary corporations that are participants to the Proposed Transactions, including direct or indirect parent corporations of such subsidiary corporations, and there are no planned acquisitions of such corporations, including Parent.

3.    The consolidated financial statements of Parent for its fiscal year ended XXXXXXXXXX indicate that Parent and its accounting consolidated group had:

(a)   total assets of approximately XXXXXXXXXX$XXXXXXXXXX;

(b)   total liabilities of approximately XXXXXXXXXX$XXXXXXXXXX; and

(c)   total equity of approximately XXXXXXXXXX$XXXXXXXXXX.

4.    Subsidiary is an indirect wholly-owned subsidiary of Parent. Subsidiary is a corporation incorporated under the laws of XXXXXXXXXX for purposes of the Act and XXXXXXXXXX. Subsidiary is XXXXXXXXXX. Subsidiary is the parent corporation of directly and indirectly owned subsidiaries and other entities that collectively XXXXXXXXXX.

5.    Profitco 1 is an indirect wholly owned subsidiary of Subsidiary. Profitco 1 has been a subsidiary of Subsidiary since XXXXXXXXXX.  Profitco 1 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX.  Its tax centre is XXXXXXXXXX and its Tax Services Office is XXXXXXXXXX. Profitco 1’s taxation year end for purposes of the Act is XXXXXXXXXX. Profitco 1 is engaged in the business of XXXXXXXXXX. Its business number is XXXXXXXXXX.

6.    Profitco 1’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxable Income (loss):

XXXXXXXXXX

Loss Carryback:

XXXXXXXXXX

Adjusted Taxable Income:

XXXXXXXXXX

7.    On XXXXXXXXXX, Profitco 1 and XXXXXXXXXX., an indirect wholly-owned subsidiary of Parent, entered into the transactions that were the subject matter of the XXXXXXXXXX, which is a loss consolidation transaction. These transactions were unwound on XXXXXXXXXX in accordance with the XXXXXXXXXX.

8.    It is expected that Profitco 1 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 1 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its XXXXXXXXXX prior taxation years.

9.    Profitco 1 has a permanent establishment XXXXXXXXXX.

10.   Profitco 2 has been an indirect subsidiary of Subsidiary since its incorporation on XXXXXXXXXX.  Profitco 2 is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation.  Its registered address is XXXXXXXXXX.  Its tax centre is the XXXXXXXXXX and its Tax Services Office is the XXXXXXXXXX.  Profitco 2’s taxation year-end for purposes of the Act is XXXXXXXXXX.  Profitco 2 is engaged in the business of XXXXXXXXXX. Its business number is XXXXXXXXXX.

11.   Profitco 2’s taxable income for its XXXXXXXXXX prior taxation years for which tax returns have been filed with the CRA is as follows:

Taxable Income (loss):

XXXXXXXXXX

Non-capital losses of $XXXXXXXXXX arising in the taxation year ended XXXXXXXXXX were carried back to reduce taxable income arising in the taxation year ended XXXXXXXXXX.

12.   It is expected that Profitco 2 will be able to fully utilize the deductions resulting from interest paid or payable on the Lossco Loan 2 either against its income for a current taxation year in which the Proposed Transactions are undertaken or by carrying back any non-capital loss for that taxation year to be deducted against its taxable income for one or more of its XXXXXXXXXX prior taxation years.

13.   Profitco 2 has a permanent establishment XXXXXXXXXX.

14.   Lossco is an indirect subsidiary of Subsidiary and wholly owned by XXXXXXXXXX which is organized under the federal laws of Canada pursuant to the CBCA and is a taxable Canadian corporation.  Lossco has been an indirect subsidiary of Subsidiary since its incorporation on XXXXXXXXXX. Lossco is incorporated under the CBCA and is a taxable Canadian corporation. Its registered address is XXXXXXXXXX, its taxation centre is the XXXXXXXXXX and its Tax Services Office is the XXXXXXXXXX and its business number is XXXXXXXXXX. Lossco’s taxation year end is XXXXXXXXXX. Lossco holds a portfolio of XXXXXXXXXX.

15.   At XXXXXXXXXX, Lossco had non capital losses available for carry forward of $XXXXXXXXXX, which may be summarized as follows:

Non-capital losses:

XXXXXXXXXX

16.   Lossco has a permanent establishment XXXXXXXXXX.

PROPOSED TRANSACTIONS

17.   Lossco will incorporate the Newcos under the CBCA. The Newcos will be taxable Canadian corporations. The taxation year-end of the Newcos for purposes of the Act will be XXXXXXXXXX. Lossco will subscribe for common shares of the relevant Newcos (the “Newco Common Shares”) on incorporation for an aggregate subscription price payable to the relevant Newcos of $XXXXXXXXXX each.  Lossco will hold the Newco Common Shares as capital property.  The Newcos will not carry on any business other than the proposed loss consolidation and their activities will be limited to investing the proceeds received upon issuance of the Newco Preferred Shares and Newco Common Shares in the Newco Loans to Lossco, as described in Paragraph 22. The Newcos will not be XXXXXXXXXX. The authorized share capital of each of the Newcos will consist of two classes of shares, common shares and preferred shares (the “Newco Preferred Shares”).

18.   The Newco Preferred Shares will be non-voting, cumulative dividend paying, redeemable, retractable preferred shares and dividends will be paid monthly. The cumulative dividends payable on each of the Newco Preferred Shares will be calculated as a percentage of the redemption/retraction price of the Newco Preferred Shares, which is equal to the interest rate on the relevant Lossco Loans plus a small spread of XXXXXXXXXX%. The cumulative dividends payable on each of the Newco Preferred Shares is currently estimated to be set at a rate of XXXXXXXXXX% per annum.  The Newco Preferred Shares dividend rate will be finally determined immediately before the implementation date of the Proposed Transaction, based on a XXXXXXXXXX% spread above the interest rate on the Lossco Loans.

19.   On a particular day to be determined by Subsidiary and Lossco, the following Subsidiary Loans will be made:

(d)   Subsidiary will make the Subsidiary Loan 1 to Lossco for a principal amount of $XXXXXXXXXX; and

(e)   Subsidiary will make the Subsidiary Loan 2 to Lossco for a principal amount of $XXXXXXXXXX.

Each of the Subsidiary Loans will be repayable on demand and will not bear interest. The Subsidiary will source the funds for the relevant Subsidiary Loans from its working capital.

20.   Lossco will use the proceeds received by it from the Subsidiary Loans to make the following Lossco Loans:

(a)   Lossco will advance the Lossco Loan 1 to Profitco 1 with a principal amount of $XXXXXXXXXX, bearing interest at a rate estimated to be XXXXXXXXXX% per annum; and

(b)   Lossco will advance the Lossco Loan 2 to Profitco 2 with a principal amount of $XXXXXXXXXX bearing interest at a rate estimated to be XXXXXXXXXX% per annum.

Interest on the Lossco Loans will be computed daily and paid monthly. The estimated interest rate on each of the Lossco Loans are arm’s length, commercial interest rates. The recourse of Lossco under the relevant Lossco Loans will be limited to amounts received by the Profitcos in respect of the relevant Newco Preferred Shares.

21.   The Profitcos will use the proceeds from the Lossco Loans as follows:

(a)   Profitco 1 will use the proceeds from the Lossco Loan 1 to subscribe for the Newco 1 Preferred Shares for $XXXXXXXXXX which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX; and

(b)   Profitco 2 will use the proceeds from the Lossco Loan 2 to subscribe for the Newco 2 Preferred Shares for $XXXXXXXXXX which will have an aggregate redemption price and stated capital equal to $XXXXXXXXXX.

22.   The Newcos will use the proceeds from the relevant Newco Preferred Shares as follows:

(a)   Newco 1 will make the Newco 1 Loan to Lossco. The principal amount of the Newco 1 Loan will equal the principal amount of Lossco Loan 1; and

(b)   Newco 2 will make the Newco 2 Loan to Lossco. The principal amount of the Newco 2 Loan will equal the principal amount of Lossco Loan 2.

Lossco will secure its obligations under the relevant Newco Loans by granting a security interest to the Newcos in the relevant Lossco Loans.

23.   Lossco will use the proceeds from the Newco Loans to repay the Subsidiary Loans to Subsidiary.

24.   All of the transactions described in Paragraphs 19 to 23 will take place on the same day.

25.   Prior to the start of each Payment Period, Lossco will make a contribution of capital to each Newco in an amount equal to the accrued dividends payable at the end of the Payment Period by each of the Newcos on their respective Newco Preferred Shares held by the Profitcos. No shares will be issued by the Newcos with respect to these contributions of capital and no amount will be added to the stated capital of any class of shares of the Newcos, or for greater certainty, to the paid-up capital of any class of shares of the Newcos. Lossco will not claim any deduction in computing income in respect of any capital contributions made to the relevant Newcos.

26.   Each of the Newcos will pay all accrued and unpaid dividends on their respective Newco Preferred Shares held by the Profitcos in cash at the end of the Payment Period from the contributions of capital received under Paragraph 25.

27.   Upon receipt of the payments of dividends described in Paragraph 26, each of the Profitcos will pay all accrued and unpaid interest due and payable on their respective Lossco Loans to Lossco in cash, pursuant to the terms of respective Lossco Loans.

28.   The following transactions will occur on or before XXXXXXXXXX to unwind each loss consolidation arrangement between Lossco and the Profitcos:

(a)   Lossco will contribute capital to the Newcos, in cash, equal to the amount of the accrued and unpaid dividends on the Newco Preferred Shares;

(b)   Using the capital received from Lossco, the Newcos will pay, in cash, the balance of the accrued and unpaid dividends on the Newco Preferred Shares to their respective Profitcos;

(c)   Each respective Profitco will pay in cash to Lossco all accrued and unpaid interest in respect of the relevant Lossco Loan;

(d)   Lossco will repay each of the Newco Loans by assigning the Lossco Loans to the respective Newcos in full satisfaction of the principal amounts due under the respective Newco Loans;

(e)   Newcos will redeem the Newco Preferred Shares held by the respective Profitcos in consideration for a non-interest bearing demand promissory note issued by the respective Newcos (the “Newco Notes”). The Newco Notes will have a principal amount and fair market value equal to the redemption price and the fair market value of the respective Newco Preferred Shares redeemed; and

(f)   Each of the respective Newcos and Profitcos will set-off the amounts due under the respective Lossco Loans against the amounts due under the respective Newco Notes as payment in full of each of these obligations.

The arrangements between Lossco and each of the Profitcos may be unwound at different times, provided that each arrangement will be unwound on or before XXXXXXXXXX.

29.   Following the completion of the transactions described in Paragraph 28, the Newcos will be wound up into Lossco. Lossco, as sole shareholder of the Newcos immediately before the winding-up, will pass a resolution authorizing and requiring each Newco to be wound up into Lossco. In addition, a general conveyance of the remaining assets of each Newco and assumption of liabilities of each Newco, if any, will be executed between each Newco and Lossco. Each Newco will file articles of dissolution with the appropriate corporate registry within a reasonable time after the winding-up resolution is passed.

ADDITIONAL INFORMATION

30.   The expected interest deductions, taxable income and carry back of non-capital losses of Profitco 1 as a result of the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxable income/(Loss) before the Proposed Transactions:

XXXXXXXXXX

Interest deductions – Proposed Transactions:

XXXXXXXXXX

Carry back of non capital losses to prior taxation years:

XXXXXXXXXX

31.   The estimated tax refund of federal and provincial income taxes to Profitco 1 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

Estimated tax refund of federal income taxes:

XXXXXXXXXX

Estimated tax refund of provincial income taxes:

XXXXXXXXXX

32.   The expected interest deductions, taxable income and carry back of non-capital losses of Profitco 2 as a result of the Proposed Transactions are as follows (all amounts are in $ XXXXXXXXXX):

Taxable income/(Loss) before the Proposed Transactions:

XXXXXXXXXX

Interest deductions – Proposed Transactions:

XXXXXXXXXX

Carry back of non capital losses to prior taxation years:

XXXXXXXXXX

33.   The estimated tax refund of federal and provincial income taxes to Profitco 2 as a result of the Proposed Transactions is as follows (all amounts are in $ XXXXXXXXXX):

Estimated tax refund of federal income taxes:

XXXXXXXXXX

Estimated tax refund of provincial income taxes:

XXXXXXXXXX

OTHER REPRESENTATIONS

34.   The Newco Preferred Shares will not at any time during the implementation of the Proposed Transactions be:

(a)   the subject of any undertaking that is referred to in subsection 112(2.2) as a “guarantee agreement”;

(b)   the subject of a dividend rental arrangement;

(c)   the subject of any secured undertaking of the type described in paragraph 112(2.4)(a); or

(d)   issued for consideration that is or includes:

(i)   an obligation of the type described in subparagraph 112(2.4)(b)(i), other than an obligation of a corporation that is related (otherwise than by reason of a right referred to in paragraph 251(5)(b)); or

(ii)  any right of the type described in subparagraph 112(2.4)(b)(ii).

35.   Lossco, Profitcos and Newcos are affiliated persons and have been related persons to each other since their respective formation. Lossco, Profitcos and Newcos will be, during the implementation of the Proposed Transactions, related persons and affiliated persons. The structure will be dismantled before the contemplated maturity in the manner described in Paragraphs 28 and 29 if any entity previously mentioned in this paragraph ceases to be affiliated following an acquisition of control by a non‑affiliated third party.

36.   None of the Profitcos or Lossco is a “XXXXXXXXXX” as defined in subsection XXXXXXXXXX.

37.   Lossco is not, and none of the Profitcos is, a XXXXXXXXXX.  Each of the Profitcos and Lossco is a XXXXXXXXXX within the meaning assigned by subsection 248(1). None of the Profitcos will acquire the respective Newco Preferred Shares in the ordinary course of its business. Lossco is not a “XXXXXXXXXX” as defined in subsection XXXXXXXXXX or XXXXXXXXXX as defined in subsection XXXXXXXXXX.

38.   Lossco and each Profitco will undertake steps to ensure that the interest income earned by Lossco under the Proposed Transactions will not materially exceed an amount that could be fully sheltered with Lossco’s non-capital losses. Each Profitco expects to earn taxable income in excess of the interest expense that will arise by virtue of the implementation of the Proposed Transactions. The interest deducted by each Profitco pursuant to paragraph 20(1)(c) in respect of their respective Lossco Loans may create a non-capital loss for the Profitcos during the period in which the Proposed Transactions occur. Any such non-capital loss would be carried back to a prior taxation year or carried forward to a subsequent taxation year in accordance with the provisions of section 111.

39.   The payment of dividends on the Newco Preferred Shares have no purpose other than the purpose described under the heading “Purposes of the Proposed Transactions”.

40.   The Proposed Transactions will be legally effective.

41.   At the time of the Proposed Transactions, Lossco will have the financial capacity to make the capital contributions to Newcos as described Paragraphs 25 and 28.

42.   At the time it is required to pay the dividends on the Newco Preferred Shares as described in Paragraphs 26 and 28 and at the time it is required to redeem the Newco Preferred Shares as described in Paragraph 28, each Newco will have the financial capacity to satisfy the applicable solvency and liquidity test under the CBCA.

43.   At all times, Profitcos will have the solvency and liquidity to service the Lossco Loans.

44.   Each of the Newco Preferred Shares will be term preferred shares.

45.   Each of the Lossco Loans will be term loans with a maturity date not later than one year after the date each such Lossco Loan is advanced.  Each of the respective Profitcos will have the right to prepay its obligations under the respective Lossco Loans without penalty.

46.   Each of the Newco Loans will be demand loans.

47.   Lossco and each respective Profitco will enter into a unanimous shareholders agreement in respect of each of the Newcos authorizing Lossco to invest any cash on hand in the respective Newcos from time to time on behalf of Newcos until such time as required by Newcos to meet their obligations under the terms of the Proposed Transactions.

PURPOSES OF THE PROPOSED TRANSACTIONS

48.   The purpose of the Proposed Transactions is to effect a tax consolidation of Profitcos and Lossco by causing Lossco to earn interest income on the Lossco Loans, thus permitting Lossco to utilize its non‑capital loss carry forwards, and to have each of the Profitcos incur interest expense to reduce its income for its current taxation year, and to the extent this creates non-capital losses for any of the Profitcos, to carry back the non‑capital losses to reduce its taxable income from prior taxation years.

49.   The purpose of both the payment and the receipt of the dividends on each of the Newco’s Preferred Shares, as described in Paragraph 18, is to provide a reasonable return on the Newco Preferred Shares issued by the Newcos to their respective Profitcos.  Furthermore, the purpose of the dividends is not to reduce the fair market value or capital gain of any share, nor to increase the total cost amounts of properties of the Profitcos.

RULINGS PROVIDED

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purposes of the proposed transactions, the proposed transactions are completed in the manner described above, and there are no other transactions which may be relevant to the rulings requested, we rule that:

A.    Provided that the particular Profitco has a legal obligation to pay interest on the particular Lossco Loan, and the particular Newco Preferred Shares continue to be held by the particular Profitco for the purpose of gaining or producing income therefrom, the particular Profitco will be entitled pursuant to paragraph 20(1)(c) to deduct, in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the particular Lossco Loan for that taxation year (depending on the method regularly followed by the particular Profitco in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

B.    The dividends received (or deemed to be received) by the Profitcos on the relevant Newco Preferred Shares held by it will be taxable dividends that will, pursuant to subsection 112(1), be fully deductible in computing its taxable income for the taxation year in which the dividends are received (or deemed to be received), and for greater certainty, such deductions will not be precluded by any of subsections 112(2.1), 112(2.2), 112(2.3) or 112(2.4).

C.    Provided that the only purpose of the dividends in Paragraphs 26 and 28 is what is described in the “Purposes of the Proposed Transactions” above and the Proposed Transactions are undertaken in the manner described above, subsection 55(2) will not apply in respect of the dividends described in Paragraphs 26 and 28 above.

D.    Each of the Profitcos will be entitled to carry‑back to its prior taxation years the non‑capital losses that are expected to arise as a result of the deductions described in Ruling A above, subject to any applicable restrictions in section 111.

E.    The provisions of subsections 15(1), 56(2), 69(1), 69(4), 69(11) and 246(1) will not apply to the Proposed Transactions, in and by themselves.

F.    The settlement of the Newco Loans, the Lossco Loans and the Newco Notes as described in Paragraph 28 will not give rise to any “forgiven amount” for purposes of section 80.

G.    None of the Profitcos will be subject to Part IV tax with respect to the dividends received from the Newcos, as described in Paragraphs 26 and 28, except to the extent that paragraph 186(1)(b) applies to impose such tax.

H.    No amount will be included in the income of the particular Newco pursuant to section 9, or paragraphs 12(1)(c) or 12(1)(x) in respect of the contributions of capital made by the particular Lossco as described in Paragraphs 25 and 28.

I.    The provisions of subsection 88(1) will apply to the winding-up of the Newcos into Lossco as described in Paragraph 29, such that:

(i)   Each Newco will be deemed, pursuant to paragraph 88(1)(a), to have disposed of its assets for an amount equal to the cost amount to the respective Newco immediately before the winding-up;

(ii)  Lossco will be deemed, pursuant to paragraph 88(1)(b), to have disposed of each of the Newcos’ common shares that it owns for proceeds of disposition equal to the greater of the amounts described in subparagraph 88(1)(b)(i) and (ii); and

(iii) Lossco will be deemed, pursuant to paragraph 88(1)(c), to have acquired the assets of the Newcos that are distributed to Lossco on the winding-up for an amount equal to the proceeds of disposition to the respective Newco.

J.    Subsection 245(2) will not be applied as a result of entering into the Proposed Transactions, in and by themselves, to re-determine the tax consequences confirmed in the rulings given.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R8 dated November 1, 2018, and are binding on the CRA provided that the proposed transactions, as described in paragraphs 17 to 24, are entered into on or before XXXXXXXXXX, and the proposed transactions related to the payment of interest and dividends and to the windup, as described in paragraphs 25 to 29, are entered into on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a)   the fair market value or adjusted cost base of any property or the paid-up capital of any shares referred to herein;

(b)   the reasonableness or fair market value of any fees or expenditures referred to herein;

(c)   the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein;

(d)   the provincial income tax implications relating to the allocation of income and expenses under the Proposed Transactions; and

(e)   tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate

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